END THE POSTAL MONOPOLY
James C. Miller III
Earlier this year, the cost of mailing a first-class letter went from 20
cents to 22 cents. It was the third increase in four years, the seventh
since the Post Office became the independent US. Postal Service in
1970. As usual, politicians decried the inefficiency of postal delivery
and promised to “do something.” But few seemed willingto consider
the one action likely to have a real effect on the efficiency ofthe U.S.
postal system: let others compete in the delivery of first-class mail.
The Evolution of the Postal Monopoly
While the Constitution provides Congress with the power “to
establish post offices and post roads,” it does not require that the
carriage of mail be a monopoly, much less a government monopoly.
Throughout the first half of the 19th century, however, Congress
enacted ever move restrictive measures limiting the private carriage
of mail. For example, an 1825 statute that reserved to the federal
government the exclusive right to carry letters for hire in vehicles
over post roads was amended two years later to prevent private
carriage on horseback or foot. This presumably made life difficult for
the Pony Express, which although often used as a symbol of U.S.
mail service, was a creature of private enterprise.
Finally, Congress passed the Postal Act of 1845—the so-called
private express statutes—which directly prohibited private companies from carrying letters for hire.’ These statutes (with a few modifications) remain the law today. They grant the government a monopCato journal, Vol.5, No. 1 (SpringiSummer 1985). Copyright © Cato Institote, All
rights resorved.
The aothor is Chairman of tho Federal Trade Commission. The views oxpressed
here arc his own and do not necessarily reflect thoso of the other commissioners.
Portions of this article are drawn from his testimony heforo the Subcommittee on
Economic Goals and Intergovernmental Policy of the Joint Economic Committee, 21
Juno 1982.
‘5 Stat. 732(3 March 1845).
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oly in the delivery ofletters (first-class mail). The monopoly does not
extend to newspapers and magazines (second-class mail), direct-mail
advertising (third-class mail), or parcels (fourth-class mail).
Through its ability to define a “]etter,” the Postal Service is in the
enviable position of being able to determine the extent of its own
monopoly. While the service has “suspended” its monopoly for certain letters (such as time-sensitive materials), it has also expanded
its monopoly by defining letters to include bills,receipts, IBM cards,
magnetic cards, magnetic tapes, and other business documents.2 Typically, as new services such as express mail have developed, the
Postal Service has first asserted that these services fall within its
monopoly and then announced a suspension of the monopoly with
respect to some aspects of the new service.3
Is the Postal Monopoly Economically Justified?
The standard economic rationale for production by a regulated
franchise monopoly, whether privately or publicly owned, is that,
under certain technical conditions, production may be accomplished
at least cost by a single firm. Government may wish to impose maximum rate-of-return regulation on such “natural monopolies” in an
attempt to reduce the allocative efficiency costs associated with unregulated monopolies. But even in the case of a proven natural monopoly, economists are ambivalent about the desirability of regulation
because of its direct and indirect costs.4
There is, however, no convincing evidence that mail service is a
natural monopoly. Indeed, most of the relevant studies have failed
to find significant economies of scale.5
2
The USPS currently defines a “lettcr” as any “message directed to a specific person
or address and recorded in or on a tangible object.” 39 C.F.R. §310.1(a).
3
The USPS has asserted that it has authority to exempt materials from the postal
monopoly porsoar,t to 39 USC. §601(b),
‘See, for example, Paul U. Joskow and Roger C. Noll, “Regulation in Theory and
Practice: An Overview,” in Gary Fromm, editor, Studies in Public Regulation (Cambridge: MIT Press, 1981), p. 10.
~Forinstance, an empirical study by the Post Office itself did not uncover economies
of scale. Sec Bureau ol’ Finance and Administration, U.S. Post Office Department,
Summary Report of Cost Sy8tern Task Force on Incre,nental Costs (Washington, D.C.,
May 1970). See also the review of studies in Leonard Merewit’z, “Economies of Scale
in Postal Service” (U.S. Postal Rate Commission (PRC); 3oAugnst 1973) andthe review
contained in Initial Decision, PRC Docket No. R74-1,pp. 78—90. Nogeneraleconomies
of scale were fcund in Rodney E, Stevenson, “Postal Pricing Problems and Production
Functions” (Ph.D. dissertation, Michigan State University, 1973), and the Department
r’ijustice Ibund virtually no credible evidence that this lie., economies of scalel is
actually the case.” See U.S. Department ofjustice, Changing the Prieate Express Laws
(1977).
150
THE POSTAL MONOPOLY
Most importantly, if mail service were a natural monopoly, competitors would find it very difficult to provide the same level of
service at the same or lower cost.6 Consequently, the Postal Service’s
position would be secure without legal protection.
The Economic Costs of the Postal Monopoly
The Postal Service provides a classic illustration of the problems
inherent in trying to determine efficient prices and hold down costs
for a regulated monopoly.
The existence of large common costs in enterprises like the Postal
Service makes it impossible to allocate total costs to individual services in a nonarbitrary manner.7 This makes ratemaking very difficult.
While it is conceptually possible to determine efficient prices by
looking at both cost and demand conditions, the necessary information is typically not available in sufficient detail. As a result, there is
no reason to believe that prices will be efficient—even before allowing for the influence of a variety of political pressures that make
themselves felt during the ratemaking process.
Moreover, with restricted entiy, an inefficient rate structure is easy
to maintain, because new firms cannot enter in response to a price
that is set too high. Thus, cross-subsidization, which is virtually
impossible under competitive conditions, occurs with some frequency in regulated industries. It is, in fact, a major source of the
economic inefficiency associated with the Postal Service. In addition,
postal costs are generally higher because the Postal Service faces
only limited incentives to produce in the least-cost manner.
‘Under special circumstances, it is theoretically possible for an entrant to provide one
ofa natural monopolist’s services at a price lower than the most efficient price, in which
case the natural monoply is said to be “unsustainable.” See John C. Panzar and Robert
D, willig, “Free Entry and the Sustainahility of Natural Monopoly,” Bell Journal of
Economics (1977), pp. 1—22. But we have no evidence that the postal monopoly is
unsustainahle. In fact, “there is no evidence that the cost conditions for that are present
in postal services.” See Bruce M. Owen and Robert D. Willig, “Economics and Postal
Pricing Policy,” in Joel L. Fleishman, ed., The Future of the Postal Service (New York:
Praeger Publishers, 1983), p. 231. More generally, the sustainahility literature is “too
specialized and insufficiently operational” to support entry restrictions as a policy
prescription. See Joskow arid Noll, p. 17.
7
See Melvyn A. Fuss, “Cost Allocation: How Can the Costs of Postal Services Be
Determined,” in Roger Sherman, ed. Perspectives on Postal Service Issues (washington: American Enterprise Institute, 1980), pp. 30—46; Owen and Willig, pp. 227—45;
and Rodney E. Stevenson, “The Pricing of Postal Services,” in Harry M. Trehing, ed.,
New Dimensions in Public Utility Pricing (East Lansing: Michigan State University,
1976), pp. 427—52.
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Inefficient Rate Structure
Because ofthe problems involved in allocating costs, precise quantitative estimates of cross-subsidies within the postal system are
difficult to obtain, It is generally conceded, however, that high-density urban service subsidizes low-density rural service. It is also
alleged that first-class mail in general subsidizes some or all of the
other classes.
The subsidy from urban to rural users arises primarily because the
Postal Service charges the same rate for all first-class mail, regardless
of the distance the mail travels and the costs of delivering it. Some
first-class mail is therefore overpriced and some is underpriced. Consequently, as the Postal Service itself has stated, “if the Private
Express Statutes were repealed, private enterprise
would be free
to move into the most economically attractive market’i
One of those areas would undoubtedly be transaction mail—bills,
bank statements, and so forth. This mail, which tends to be generated
by a few, high-volume local business mailers (for example, banks,
utilities, and department stores) and tends to be destined for highdensity areas, is relatively inexpensive to deliver.a If entry were
permitted, the price for delivering transaction mail (which constitutes a significant portion of first-class mail) would fall. This is what
the competitive process is all about, notwithstanding the fact that the
Postal Service refers to it as “cream-skimming.”°Such cream-skimming opportunities only occur when prices exceed costs. The existence of such opportunities is therefore evidence that current pricing
misallocates resources.”
Whether there is an additional subsidy going from first-class mail
to other classes is an issue of some contention. However, the Postal
Rate Commission’s chief administrative law judge concluded that
such a subsidy did exist, and that “the Postal Service has become a
tax-collecting agency collecting money from first-class mailers to
...
‘U.S. Postat Service, Statutes Restricting Private Carriage of Mail and their Administration (House Committee on Post Office and Civil Service, 93d Cong., 1st Sess.,
Committee Print 1973), p. 6.
‘The Postal Service offers discounts for presorted first-class mail of 500 or more pieces.
It also offers discounts for first-class mail addressed with machine-readable “Zip +
four” address labels. However, these discounts do not take into account the number of
separate places to which the mail is addressed, nor the population density of those
locations.
“Ibid., p. 5.
“See, for example, Alfred B. Kahn, The Ecoromicr of Regulation: Principles and
Institutions, Volume II: Institutional Issues (New York: John Wiley and Sons, 1971),
pp. 220—46.
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THE POSTAL MONOPOLY
distribute to other favored classes.”~If this is the case, entering firms
would be able to lower the average price charged for first-class mail.
Higher Overall Costs
The postal system is a particularly good source (in the event that
one is needed) for evidence that private enterprise performs better
than government enterprise and that competitive markets perform
better than nionopolies.5a
The costs of the Postal Service are significantly higher than they
should be because the incentive to hold down costs—most notably,
labor costs—is limited. Postal workers are paid far more than is
necessary to retain their services.’4 Because entry into postal markets
is restricted, the Postal Service is able to pass those higher costs
along to its customers.
Higher costs also result from failure to innovate. For example, as
of 1974, the Postal Service still shipped all of its parcels in bags,
which resulted in high breakage rates and handling costs. When the
United Parcel Service (UPS)—a private competitor—introduced
mechanization and containerization, breakage was reduced and han“See James C. Miller 111 and Roger Sherman, “Has the 1970 ActBeen Fair to Mailers?”
in Sherman, Perspectices, pp. 64—65.
3
‘ There are, of course, many other sources. See Roger Ahlbrandt, “Efficiency in the
Provision ofFire Services,” Public Choice 16(1973): 1—15 (flndingprivate firm provides
goods at lower cost than government agency); W. Mark Cram and Asghar Zardkoohi,
“A Test ofthe Property-Rights Theory ofthe Firm: Water Utilities in the United States,”
Journal of Law and Economics 21(1978): 395—408 (finding higher operating costs in
publicly owned water utilities); David C. Davies, “The Efficiency ofPublic v, Private
Firms: The Case ofAustralia’s Two Airlines,”Journal ofLaw and Economics 14(1971):
149—65 (finding private company more efficient than public firm); Cotton M. Lindsay,
‘A Theory of Government Enterprise,”Journal of Political Economy 84(1976): 1061—
77 (determining government ma~agersmaximize self-interest by producing output
Congress is likely to value more hi~hlythan consumers do); and Sam Peltzman, “Pricing
in Public and Private Enterprises: Electric Utilities in the United States,’ Journal of
Law and Economics 14 (1977): 109—47 (finding that government-owned firms adopt
pricing policies that enhance their political support, not consumer welfare),
A number of Federal Communications Commission (FCC) decisions that altered the
monoply conditions formerly prevailing in the common carrier communications field
provide empirical evidence that competitive markets perform better than monopolized
ones. The Chairman ofAT&T, for example, testified that as a direct result ofthe FCC’s
rulings, the Bell System companies were forced to become more innovative and to
deploy the results ofthat innovation more rapidly. In addition, the prices Bell charged
were generally reduced and new policies reflecting more cost-related pricing were
adopted. See generally letter from FCC Chairman R. E. Wiley to All Members of
Congress on HR. 12323,25 May 1976; and FCC, Second Report in Docket 20003, FCC
80-5, released 29 January 1980.
1
‘ See Douglas K. Adie, “How Have Postal Workers Faired Since the 1970 Act?” in
Sherman, PerspectIves, pp. 74—93.
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dling costs lowered. As a result, the Postal Service has steadily lost
business to UPS.’5
The success of private express mail service is also indicative of the
benefits of competition. Despite the threat of suit by the Postal Service, numerous private carriers developed in the 1960s and 1970s,
specializing in the rapid and reliable transportation of commercial
documents. In 1973 the Postal Service responded and established
its own express delivery service called “Express Mail.” Despite
attempts to expand the postal monopoly to include express mail
services, private services now compete openly and freely. Indeed,
private companies such as Federal Express and Purolator deliver
overnight to more cities than does the Postal Service.
Fears of Higher Prices and Reduced Service
If repeal of the private express statutes will reduce rates for some
postal services, will it also raise rates for others P This is a major fear,
particularly for residents of rural areas. There are, however, two
reasons for believing that such fears are exaggerated.
First, if competition reduces the overall level costs, this will benefit
everyone, including consumers of high-cost services. Second, our
experience with the deregulation of trucking and airlines suggests
that fears of significant reductions in rural service due to postal deregulation are probably unfounded. Some small cities are no longer
served by large jets, but commuter airlines have used smaller planes
to serve small communities at far lower costs. Thousands of new
companies have gone into trucking, and as a result trucking service
to rural areas has improved.
Ifwe can obtain airline and trucking service throughout the country
without a government monopoly, competition can also work for letter
delivery. The configuration of service may change somewhat, but
surely everyone would have access to affordable mail delivery.
If a subsidy is deemed necessary, it might be patterned after the
small-community air service program implemented along with airline deregulation. This program now subsidizes air service to 145
communities at an annual cost of $51 million. This cost has declined
significantly since the program began in 1978, and the program is
thThe USPS tried to learn from UPS’s success by building a one billion dollar hnlk mail
system to improve its handling of parcel post mail. Hut that effort has been such a
failore that the General Accounting Office has suggested USPS write the investment
off as a loss. See, for example, Joel L. Fleishman, “Postal Policy and Public Accountability: Is the 1970 Bargain Coming Unglued?” Manuscript, Harvard University, Program on Information Resources Policy, 1981, p. 94,
154
THE POSTAL MONOPOLY
scheduled to be phased out. Yet, on the whole air service to small
communities has improved since deregulation.
The cost of the small-community air service program has been
running at about 0.2 percent of total domestic airline revenues. The
analogous figure for the Postal Service would be $26 million—a
paltry sum for ensuring that there will be universal mail delivery,
and for enabling the benefits that competition would bring to this
industry.
Conclusion
The burden of showing that the postal monopoly is necessary or
desirable has not been met. All the available evidence suggests that
competition in the market for first-class letter delivery would create
substantial benefits.
If the private-express statutes were repealed, existing mail firms
would expand and new ones would enter the market, Probably just
as important, the spur of competition would mean improvements in
the Postal Service itself Private enterprise will get the mail delivered—just as it did in the Old West.
155